Consumers remain financially vulnerable as interest rates bite

Rising interest rates, high food and fuel prices and load-shedding ensured that consumers remain financially vulnerable in the second quarter of 2023 (Q2 2023). This is despite them reigning in their purchases in Q1 2023 and continuing to do so Q2 2023. Moreover, a prolonged period of financial vulnerability affected their mental state and intensified the deterioration in their family life (in Q2 2023).  This fragile state of consumer finances as witnessed by key informants who deal with consumers daily, is reflected by the Momentum-Unisa Consumer Financial Vulnerability Index (CFVI), which remained below 50 points in Q2 2023.

The CFVI as measured from the views of consumer key informants who deal with consumers daily, increased from 49.1 points in Q1 2023 to 49.3 points in Q2 2023. At 49.3 points the CFVI was barely unchanged from Q1 2023. The CFVI had now been below the level of 50 points for 12 out of the last 15 quarters (since Q3 2019), indicating a persistent state of financial vulnerability.

High inflation and expected inflation contributed to the South African Reserve Bank to increase the repo rate by another 50 basis-points in Q2 2023, following a 75 basis-point increase in Q1 2023. High interest rates directly and indirectly impacted the four subcomponents of the CFVI compared to Q1 2023, with three deteriorating and one improving. In Q2 2023 rising interest rates contributed to higher debt servicing vulnerability. Having to channel more money towards debt servicing while becoming more income vulnerable, consumers sacrificed savings for both emergencies and retirement, negatively affecting their savings vulnerability level. However, consumers were less expenditure vulnerable because they continued to reign in their purchases to be more in accordance with their income, bringing them closer to balanced budgets.

Rising prices and load-shedding remained the risk factors which exerted most pressure on consumer finances during Q2 2023. However, rising interest rates became one of the strongest high-risk factors in Q2 2023 following the interest rate hike in May 2023. Whereas 76.3% of key informants deemed rising interest rates to be a high risk to consumer finances in Q1 2023, this changed to 81.6% in Q2 2023.

Economic and consumer finance outlook

Consumer key informants do not expect an improvement in the state of consumer finances in Q3 2023. With regards to the expectations for the economic environment and consumer finances, the following were the majority views for Q3 2023:

  • 82.7% expect consumer finances to remain at the current vulnerable level or worsen.
  • 84.7% anticipate general prices to increase, whether at the same rate or a slightly slower pace.
  • Around 80% expect the global and domestic economic situation to remain the same or worsen.
  • 72.4% foresee an unchanged or worsening unemployment situation.

Consumer key informants further expect high food and fuel prices to continue exerting pressure on consumer finances in Q3 2023, continuing as top three high-risk factors as identified for Q2 2023. Political instability and corruption are expected to become a top three high-risk factor in Q3 2023, and the impact of high interest rates to increase further.

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